The legal framework for misleading commercial practices
The marketing of complex financial products is governed by a law that allows borrowers to challenge contracts concluded on the basis of misleading information. Article L.121-1 of the French Consumer Code provides the basis for this protection in respect of misleading commercial practices.
A unique feature of this scheme is that it can be invoked by non-consumer borrowers, local authorities or legal entities, broadening its scope of application. A ruling by the Saint-Étienne Commercial Court on 13 December 2012 states that "the provisions relating to misleading commercial practices can be used to challenge the validity of structured loans, including those taken out by legal entities.
It is linked to other protective mechanisms, such as the banker's duty to advise and the information obligations of investment services providers. It has the advantage of providing an autonomous basis with more dissuasive sanctions, including criminal penalties.
Criteria for classifying misleading practices
In the case of financial products, there are several alternative criteria for classifying a commercial practice.
Firstly, the omission of substantial information necessary for the borrower to make an informed decision is a misleading practice. In a ruling handed down by the Lyon Court of Appeal on 18 September 2013, the judges penalised a banking institution for having The company "concealed essential information on the product's development conditions and its potential financial repercussions".
Secondly, misrepresentation of the essential characteristics of a financial product may constitute a deceptive practice. Structured loans indexed to currency parities are subject to vigilance in this respect.
Finally, the concealment of the risks inherent in the products constitutes a criterion. Case law punishes institutions that play down or ignore the specific risks associated with the financial products they offer.
The principle of consistency in commercial information
The regulations require consistency in the information provided to customers, a principle enshrined in case law and the General Regulation of the Autorité des Marchés Financiers (AMF).
Article 314-11 of the AMF General Regulation requires that advertising material be consistent with contractual documents. This principle enables investors to challenge transactions that are attractively presented in the advertising, but whose risks are revealed in the technical documents.
Case: an establishment condemned for having, according to the Lyon Court of Appeal (18 September 2013), "We have chosen a presentation based essentially on the doubling of capital, while concealing the nature and conditions of the performance risk. This decision illustrates the application of the principle of consistency.
The obligation to present the least favourable characteristics. As confirmed by the Commercial Chamber of the Court of Cassation on 8 March 2011, the service provider is liable if it fails to present "the least favourable characteristics and the risks inherent in the operation.
Penalties for misleading commercial practices
There are various penalties for misleading commercial practices.
In civil law, the borrower may obtain annulment of the contract on the grounds of lack of consent and damages to compensate for the loss suffered. Case law tends to consider that the loss corresponds to the loss of opportunity to have made a more suitable or less risky investment.
The criminal penalties are dissuasive, with article L.132-2 of the French Consumer Code providing for penalties of up to two years' imprisonment and a €300,000 fine for individuals. For legal entities, the fine can be quintupled.
Finally, the regulatory authorities, such as the AMF and the ACPR, can impose administrative penalties for breaches of the rules of good conduct. These sanctions, which often receive media coverage, have a reputational impact on the institutions concerned.
Emblematic cases and their scope
There have been a number of court rulings concerning misleading commercial practices in financial matters.
In the field of mutual funds (FCP), the case decided by the Lyon Court of Appeal on 18 September 2013 is a benchmark. The Court found a credit institution guilty of misleading commercial practices when it marketed an FCP by promoting the potential doubling of capital without clearly explaining the associated conditions and risks.
Litigation concerning structured products and toxic loans has increased since the financial crisis. In a decision handed down on 28 January 2014, the Paris Tribunal de Grande Instance (High Court) fined a bank for misrepresenting the risks associated with interest rate swaps offered to an urban community.
Case law seems to be adopting a protective approach towards borrowers, even those considered to be 'well-informed'. This development reflects a growing awareness on the part of judges of the increasing complexity of financial products and the asymmetries of information between financial institutions and their customers.
Litigation relating to home loans indexed to foreign currencies, where the borrowers had not been adequately informed of the exchange rate risks. In a ruling on 9 December 2014, the Limoges Court of Appeal held that the banking institution had failed to provide "objective and sufficient information to warn of the risk taken."
Sources
- "Bank liability and financial engineering", JurisClasseur Commercial (2015)
- Decision of the Lyon Court of Appeal of 18 September 2013
- Judgment of the Commercial Chamber of the Court of Cassation of 8 March 2011
- Limoges Court of Appeal ruling of 9 December 2014
- Article L.121-1 of the Consumer Code
- General regulations of the Autorité des Marchés Financiers, article 314-11
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